Answer-to-Question-_7_

The facts of the case are that Mykola:

-left country U to stay in country X on 01/01
- needed to extend stay to 30/06/01
- in 05/06/01 stayed in the appartment they owned in Country X
until 31/08/01
- Stayed in hotel 31/08/01-05/09/01 before leaving the country on
05/09/01

The domestic rules of countries are different in terms of

residency. However, both treat tax year start as 01/01/xx, so for
calculation purposes number of days spent in a given country
start 01/01/xx and end 31/12/xx

Country U:
-resident must be absent for 8 months to be non-resident,
-if return within 5 years-- become resident again immediately.

Country X:
- if there is 183 day presence, individual becomes a resident.
- after 365 days of absensce individual can become non-resident
again.

On the face value, Mykola will become non-resident of country U,

because he has left the country for more than 8 months (9 months
in fact, even if in transit stay before flight to Country U is
excluded). As Mykola stayed more than 183 days in Country X, he
will become resident of Country X for the period
01/01/01-05/09/01. However, Mykola, under country U's laws
becomes a resident for period 05/09/01-31/12/01 again, whilst
presumably they would be the resident for State X as well, since
Country X drops residency status only after 365 day absence.As
such Mykola's residence is double residence.

For period 05/09/01-31/12/01 Article 5(2) of tax treaty should be

invoked, which looks how to decide a tiebreaker, which decides in
which country an individual will be deemed to be resident. The
criteria listed out in 2.1a-d are in terms of priority, so if
first criteria is met, then others do not need to be considered.
First point is permanent home available, Mykola has home in both
states, it is arguable if home in state X is permanantly avilable
to him, but the fact that he managed to move in to it in May
could point that it is.Secondis vital interests, Mykola has
family in state U, but also has family ties in state X and bank
account. Even though U is a more likely state of residence, it is
possible that this would have to go to MAP, then as per Brien v
QUingly, Beng Tan, concepts of home could be interogated further.
If countries cannot solve this, and are signed up to Mandatory
binding arbitration this could also offer a decisions.

Why does this matter? It is because resident of a country is

taxed on worldwide income, whilst source country typically taxes
at withholding tax rate whilst and residence country gives
credit, or exempts as per treaty.

Need to look at employment article 15(2)c, as Mykola seems to be

working through a PE. However, as it is a building site PE, it
needs to be determined if it is less than 1 year project.

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Answer-to-Question-_3_
Extent to which MAP provides for a definitive solution under
Article 25 OECD 2017

Mutually agreed procedure is a way for taxpayer to solve

different treatment between two or more tax authorities.

If taxpayer thinks they have suffered double taxation, they can

refer matter to tax authorities, who then endeavour to settle the
matter within 3 years. The process goes in following manner:
taxpayer initiates MAP, provides necessary documents, competent
authorities reach a decision and taxpayer is allowed to accept of
decline the decision.

Taxpayer's have tried to argue for different MAP decisions by

questioning the MAP process in cases like Garland (where judge
allowed access to relevant documents), the principles that came
out of such cases where that tax authorities will need to weigh
negatives of disclosing negotiations between states with public
good (not solely impact on the taxpayer).

However, key case demonstrating issues with MAP is

GlaxoSmithKline, where US authority investigated pricing of an US
company. In this case, UK headed group had a subsidiary in the
US, which was selling a product that earned a very large margin
of profits. UK parent argued that parent's rights to product and
product's IP meant that UK was entitled to a award, whilst US was
not awarded as much as the functions, assets and risks were not
as high. US overruled this pricing, as a result placing a
significant $2bn tax bill, without corresponding adjustment in
the UK. Even though MAP was involved, authorities did not reach a
conclusion, and court decision did not enforce authorities to
make a decision. This case demonstrates how economic double
taxation can be not remedied by MAP.

In 2015 BEPS action as a minimum OECD recommended to implement

Article 25(1)-3 as well as asking tax authorities, to provide
Advance pricing agreements, and to make MAP easy for taxpayer to
access (e.g. ability to ask any of relevant countries to initiate
MAP; putting sufficient funding and resources for MAP. OECD also
recommended as best practice to provide guidance on MAP,
interaction of MLI, MAP and BAPA and Mandatory Binding
Arbitration.

Mandatory Binding Arbitration (MBA) is a strong (though at this

point optional) measure included in Article 25. If choose MBA,
this means if MAP is invoked by the taxpayer and competent
authorities do not come at mutually acceptable solution they can
refer this issue to MBA. MBA consists of 5 people panel, 2 people
chosen by each competent authority and 1 by the panel. MBA can
solve the issue in two ways: 1. For panel to give an
opinion/solution to double taxation(if one of the authorities
chooses, then this is the default option)2. For panel to choose
between options offered by each state.

MBA strenghthens MAP, however, it is not completely solving the

issue because a lot of countries did not choose to accept MBA
through MLI, and also because not all countries are within OECD
framework.

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Answer-to-Question-_4__
Report considering allocation of taxing rights under Art.10 of
the OECD MTC 2017 and UN MDTC 2017

Article 10 of the UN model reporduced OECD's model, with

exception to paragraph 2, and paragraphs 4 and 5, which refer to
independent personal services from a fixed base.

OECD and UN models on taxation of dividends are similar in many

aspects. First starting point is that dividends are investment
income and are taxed in a source state, as well as residency
state. Dividends are taxed to a limited WHT in source state and
residence state either gives a credit (WHT and in some cases
Underlying tax), or exempts dividends.

Both models invoke concept of beneficial owner (see provost on

case clarifying that). Benficiary owner is an owner that receives
the benefits from the dividend and has full control over how to
use it. The treaty doesn't apply to resident state recipient if
they are not the beneficial owner of the dividend.

In OECD model source state reduces WHT to 5% if beneficial owner

is a company owning at least 25% of shares in the company over
365 days, otherwise WHT is restricted at 15% for beneficial
owners. UN Model does not set WHT percentages and leaves for the
countries to agree them through bilateral negotiations.

Another important part of the article is OECD Art.10(4), which

essentially includes a situation where a contracting state is
receiving dividends from another country where PE of a company
from a third country is based. In such case, this is considered
to be taxed under Art.7 (as profits attributed to a PE) with
corresponding adjustments for transfer pricing. UN refers to a
company performing independent personal sercvices from a fixed
base as well as a permanent establishment.

UN Model Art10(5) bars (just like in OECD model) from taxing

dividends paid by company resident in the otehr state merely
because the company derives income or profits in the taxing
state, except that UN model also refers to fixed base.

Both models may in practice not be important for countries that

exempt dividends(EU members, Australia, New Zealand, UK for most
dividends).

In case of treaty abuse (such as treaty shopping) denial of

treaty benefits is introduced under OECD art.29 under entitlement
of benefits.

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Answer-to-Question-_6__

First it is important to note what happened:

-Enersub in country B is a subsidiary of Energio Ltd
-Enersub wanted to build a new generator by 01/01/03
-Enersub tried to obtain bank funding but failed
-03/02 Enersub obtained lending from the parent of $30m at
IBR+4%, with requirement to use loan for building the generator
-10/03/20022 contract amended to extend the loan to six months
and increase interest to IBR+8%
-10/04/2022 $60m interest at IBL+9%

Need to consider Financial transactions report 02/2020 (which

relies on BEPS AP 4(interest deductions to reode tax base) and
Action points 8-10(TP) and amended OECD transfer pficing guidance
Chapeters 1 and 10). According to the report need to consider 2
questions: 1. If and what part of lending is loan or
alternatively equity. 2. How this loan would be taxed using
transfer pricing principles, which can be found in OECD TP
Principles guidance and treaties based on OECD model.

1. Is this equity or capital? Need to look at the qualities of

the loan to establish this. For example the amount lent, period
of time, size of the loan, size of interest. Given that initial
loan was $30m it would be important to establish how the amount
was agreed, and on what basis the amount was increased to $60m.

2. Connected parties, pricing between connected parties under

Article 9.
-First thing to establish if these are connected parties. Given
that this is a parent, Energio Ltd participates directly in the
manegemtn, control and capital of Enersub and will be deemed as
Associated Enterprise under Art9(1)a.
As per article 9(2) the tax authority will try to determine
profits on which tax should be charged. This may result in
reduced profit in Country A and bigger profit in Country B. In
such case if only one tax authority of country B is working on
this there would be a need for appropriate adjustment in Country
A.

The pricing will need to be determined looking at functions,

assets, risks of both enterprises. Given that banks refused a
loan, CUP may not be appropriate. Profit split or TMNE might need
to be applied.

The bank rejected lending. The question arises if this was a

commercial lending that would have occured under arm's length
price. If such lending would have not occured under third party
conditions, it is possible that it would be disallowed or
overwritten to a different transaction by tax authorities under
non-recognition.Tax authorities could argue that lending was
uncommercial and treat transaction as something different, for
example to treat loan as a capital contribution and interest paid
as distributions.

Worth to look at case law DSG retail that looks at IOM reinsurer
reinsuring warranties for UK group. The pricing was found to be
not according to arm's length and replaced by a low rate.

MAP if adjusted amount and no adjusting amounts in the other

country. To avoid that should use Adcanced Pricing Arrangement
and involved both tax authorities at the begining.

General antiavoidance measures may apply such as GAAR of s441

CTA09 unallowable purpose challenge in the UK.